Video

Dovishness in the minutes of the Fed's July policy meeting softened the US dollar, and gold is climbing back towards a test of key resistance partly on 'stranger and stranger' developments in Washington.

FOMC meeting: initial thoughts

Fed statement shows little has changed but December commitment underpinned

Janet Yellen press conference currently underway

The US Federal Reserve has kept rates on hold. Photo: iStock

By John J Hardy

Overall assessment is that there is very little change to the statement and economic forecasts, but a fairly strong commitment to a December rate hike in the dot plot. Note the three dissenters.

It's a real mixed bag, but the market is taking it as somewhat dovish on the longer-term Federal Reserve policy forecasts and perhaps this was the one chance for the Fed to show its teeth in the face of financial stability and political risks and once again failed to do so. It will be interesting to see if Janet Yellen's press conference shows the same lack of conviction as previous appearances.

Adjustment to statement:

Description of the economy: almost nonexistent changes

Description of inflation: no notable change

Policy guidance: hike case cited as having strengthened

Dissenters: three dissenters, who wanted to hike - this is perhaps hawkish but not a major Surprise - all from regional Fed presidents, none on the board dissenting

Graphic: comparison of July and September statements

Accompanying materials

Growth forecasts - 0.1% downgrade for 2016

Inflation forecasts - 0.1% downgrade of headline for 2016, no changes for core CPI or longer term projections.

Unemployment rate: 0.1% upgrade for 2016

Dot plot: looks like a strong commitment to a December rate hike as most show a forecast of 0.50-0.75% for the policy rate at the end of this year. As well, there was a downgrade of the longer-term policy projection to 2.75-3.00% from more like 3-3.25% at the June meeting which is not a big surprise after discussion of a lower neutral policy rate recently.

Also, please see additional comments and thoughts from further perusal of the statement, accompanying materials, and the Yellen presser as comments at the bottom of this post.

A cynic might say that the Fed want to be seen to be acting in a fiscal prudent manner but in truth are unable to do anything until after the presidential election. we will see a more determined/precise approach to base rate normalisation only after the election process is completed.

Jim the Fed/Yellen had a chance to do something earlier in the year but preferred jawboning than action. Now they are in a three month window of time where there mandate prevents them giving any influence to a presidential election result. They may have intended the 4 increases...some of the Fed may even have believed they would normalise rates quickly but they just failed to start the ball rolling at the start of the year. In the UK our politicians specialise in dithering but always say the right things in the media but nothing ever happens much the same as we are seeing with the Fed just now :-(

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